Billionaire investor Warren Buffett on Saturday attacked what he saw as tricks used by US companies to boost earnings and stock prices, but he defended one oft-criticized practice: share buybacks.
“As the subject of repurchases has come to a boil, some people have come close to calling them un-American — characterizing them as corporate misdeeds that divert funds needed for productive endeavors,” Buffett said in his annual letter to shareholders.
“That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital,” he wrote.
Some critics, including BlackRock Inc chief executive officer Larry Fink, think the practice of companies buying back their own shares to boost earnings has been used to excess.
Repurchasing shares boosts earnings per share by reducing the shares remaining on the market. Critics contend the money can be better used to hire employees or buy equipment.
Buybacks fell to an average US$2.3 billion a day during the January-February earnings season, TrimTabs Investment Research Inc data showed on Monday last week, after spiking to US$5.7 billion a day in early-to-mid 2015.
Last month, Fink warned CEOs of S&P 500 companies in a letter that the world’s largest asset manager would be looking for an explanation of how cash from corporate tax cuts touted by US President Donald Trump will be used, especially if it is deployed for buybacks.
Buffett can buy Berkshire’s own shares back at 120 percent or less of book value, but that has “proved hard to do,” Buffett said.
“Our buying out ‘partners’ at a discount is not a particularly gratifying way of making money. Still, market circumstances could create a situation in which repurchases would benefit both continuing and exiting shareholders,” he said. “If so, we will be ready to act.”
Buffett was less sanguine on other practices used by public companies, saying “too many” are deviating from generally accepted accounting principles (GAAP) to present better earnings numbers.
Buffett said it “makes us nervous” that companies regularly leave out what they call “restructuring costs” and “stock-based compensation” from their expenses, boosting profits by deviating from standard accounting practices.
“To tell owners year after year, ‘Don’t count this,’ when management is simply making business adjustments that are necessary, is misleading. And too many analysts and journalists fall for this baloney,” Buffett said.
Buffett also used his annual letter to laud immigrants and their contribution to the growth of the US economy amid US President Donald Trump’s anti-immigrant stance.
“Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers,” he wrote.
Buffett steered clear of any mention of Republican Trump. He had supported Democrat presidential candidate Hillary Rodham Clinton in her bid to win the White House.
Buffett’s Omaha, Nebraska-based conglomerate released its latest results on Saturday, showing fourth-quarter profit improved 15 percent, but most of the gains came from the paper value of Berkshire Hathaway Inc’s investments and derivatives contracts.
Berkshire earned US$6.29 billion, or US$2.55 per Class B share. That is up from US$5.48 billion, or US$3.65 per Class B share.
Berkshire generated US$58.3 billion revenue in the quarter, up from US$51.7 billion a year earlier.
Berkshire’s investments and derivatives were worth about US$1.2 billion at the end of the quarter, up from US$399 million. That overshadowed the 6 percent profit decline at Berkshire’s operating businesses.
For the full year, Berkshire’s earnings were nearly flat at US$24.07 billion, or US$16.05 per Class B share.
Berkshire owns more than 90 companies, including railroad, clothing, furniture and jewelry firms.
Additional reporting by AP
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